Cerberus Capital Management: Purchase of Distressed Assets
(7 years, 8 months ago)
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George Kerevan (East Lothian) (SNP)
It is a pleasure to speak under your chairmanship again, Mr Owen. This is a very complex issue. I shall try to cover it as briefly—
Albert Owen (in the Chair)
Order. The hon. Gentleman needs to move the motion.
George Kerevan
Indeed. I shall move the motion that we are to consider—actually, I do not have the official piece of paper with me; forgive me, Mr Owen.
As I said, this is a very complex issue. I want to be as fair as possible to everyone, including Cerberus itself. I will take interventions, but I ask hon. Members to delay introducing any individual cases until I have developed, as rapidly as possible, the—
Albert Owen (in the Chair)
Order. Will the hon. Gentleman take his seat? I want to start doing this properly; we have already had two debates in which the Member did not move the motion. If the hon. Gentleman just reads from the Order Paper, his motion will be in order.
George Kerevan
I beg to move,
That this House has considered the purchase of distressed assets by Cerberus Capital Management.
Cerberus Capital Management is an American private equity firm that specialises in distressed investing—purchasing so-called distressed or non-performing loans. Few people in the UK have heard of Cerberus, but it is the biggest purchaser of distressed assets in the world. Since 2010, Cerberus has acquired more than 1.2 million distressed or non-performing loans, worth more than $80 billion. Simply put, Cerberus is the world’s largest debt collector.
Let me begin by saying that so-called distressed loans are often anything but. Since the banking crisis of 2008, we have seen a sorry catalogue of thousands of instances in which banks have forced legitimate borrowers into distress or even insolvency through no fault of their own. The so-called distress that we are discussing is largely manufactured. That has come about for a variety of reasons: interest rate swap mis-selling, the infamous Royal Bank of Scotland global restructuring group’s dash for cash, and outright criminal fraud such as occurred at HBOS Reading.
Even where such egregious or criminal behaviour has not taken place, there are too many instances of banks deciding that they no longer wish to support small and medium-sized enterprise customers in sectors that the lender now considers non-core to its shrinking loan book. As a result, thousands of legitimate customers find themselves being sold on to firms such as Cerberus without their knowledge or against their wishes. Because loans to SMEs are unregulated, those customers have little or no redress. My intention today is to put on record the plight of those badly served bank customers and to expose the exploitative and often inadequate business model used by Cerberus—a model that is also bad for the British taxpayer.
Jim Shannon (Strangford) (DUP)
I thank the hon. Gentleman for bringing this matter to Westminster Hall for consideration. In the light of what he has said, does he agree that although the mortgages and loans are currently owned by entities licensed by the Financial Conduct Authority, they, like any UK mortgage, could be sold in the future to an entity that is not regulated, meaning that customers would need to seek redress under the Consumer Rights Act 2015? Does he agree that the Government must consider additional protection for people whose lives have been turned upside down since the collapse of the Northern Rock bank?
George Kerevan
I agree, and the hon. Gentleman gets to the heart of the issue that we want to bring before Treasury Ministers, which is that even when loans were initially regulated, they can be sold on to unregulated parties, such as Cerberus, at which point there are no guarantees about the behaviour of those companies and how customers will be treated.
Corri Wilson (Ayr, Carrick and Cumnock) (SNP)
Will my hon. Friend give way?
George Kerevan
If my hon. Friend will forgive me, I will not, because I need to develop my case a little so that the Minister knows where I am going.
Cerberus has taken advantage of the situation. It is now the biggest purchaser of distressed real estate debt in Europe. It has acquired loans from such banks as Santander, RBS, Clydesdale, Yorkshire, Lloyds and banks in Italy and Scandinavia. It purchased £13.3 billion-worth of Northern Rock mortgages in 2015. Cerberus has also—we may come to this, and I will treat it in a very gentle fashion—purchased the Northern Ireland loan book of the National Asset Management Agency, which was set up by the Irish Government to dispose of property loans inherited from failed banks. We know that that is subject to serious fraud inquiry, and I will be very careful not to step into those legal areas.
The key question is how Cerberus makes its money. It claims to make a return for its investors in the range of 17% to 20% per annum, which is a staggering amount. The key way it makes its money is through tax avoidance. That is perfectly legal, but hardly the business model that the Treasury should be encouraging.
Cerberus manages distressed debt bought in the UK and Europe through a multiplicity of shell companies based largely in the Irish Republic. Those entities usually have the word “Promontoria” in their titles. They are, in turn, subsidiaries of other Cerberus Group companies registered in the Netherlands. Essentially, the Dutch companies lend money to their Irish subsidiaries at high interest rates to effect the asset purchases. That ensures that most of the cash generated from the purchased loans, or from liquidating distressed assets, flows back to the Netherlands in the form of transfer payments. According to an investigation by The Irish Times, six key Cerberus Promontoria holding companies in Ireland collectively paid a miserly €15,500 in tax in 2015.
The tax avoidance scheme means that Cerberus can offset the risk of purchasing so-called distressed loans. With the bulk of the financial risk removed, the true surplus profit for Cerberus comes from squeezing the distressed assets. That explains why Cerberus has been prepared to outbid rival US equity firms to acquire swathes of European distressed debt. My question to the Minister, and my key point, is this: has the Treasury made any calculation of the tax loss to the UK of the purchase by Cerberus of British so-called distressed assets, mortgages and properties? In particular, what corporation tax has Cerberus paid on the loan book purchased from United Kingdom Financial Investments Ltd in 2015—the Northern Rock portfolio?
Corri Wilson
Does my hon. Friend agree that trying to get answers from Cerberus Capital Management on this issue is like drawing blood from a stone? Attempts to communicate with it, by both myself and my constituents who have been impacted, have proven entirely fruitless, and calls for a meeting have fallen on deaf ears.
George Kerevan
My hon. Friend reveals something that many other Members, and people in other jurisdictions, have discovered: the company is unwilling to engage publically and is known to be highly secretive in its operations.
I want to continue on the issue of how Cerberus makes its cash. Cerberus is not a bank. Its business is not to make loans and earn interest. It is an investment fund that seeks a capital return, and that means it has to extract more value from the loan book than it paid to acquire it. Cerberus appoints local agents to review the loan books that it purchases, and it either squeezes more revenue by increasing lending rates or puts the client into liquidation in order to realise the value of the property.
Of course, it is theoretically open for SME clients to pay off their loan by refinancing with another lender. The problem is that Cerberus and its agents have no interest in letting that happen unless they can extract facility fees, which make such a transfer prohibitively expensive in most cases. Such fees often represent a significant percentage of the overall size of the original loan. For instance, the support group working with clients caught in the mis-selling of interest rate swaps by the Clydesdale and Yorkshire banks—clients transferred to Cerberus without their consent—reports that in many cases Cerberus or its agents refuse to accept full repayment of the loans. Instead they insist on adding backdated default interest and break clause costs, which were the subject of the original mis-selling.
I will now turn briefly, if you will indulge me, Mr Owen, to events in Northern Ireland. Again, I refer to the sale by NAMA—the Northern Ireland toxic bank agency—of property loans in the north of Ireland. That is subject to criminal investigation, and I will not go there, but I want to give some of the timings and the background of what happened.
The original bidder for the NAMA assets in Northern Ireland was a company called PIMCO, which is a California-based global investment company. PIMCO withdrew from that sale when it became aware of a £15 million private fee arrangement involving PIMCO’s US lawyers, Brown Rudnick, and two Irish individuals close to NAMA. After PIMCO withdrew, Cerberus had an unsolicited approach by agents acting on behalf of NAMA itself on 6 February 2014. Barely a week later, on 14 February 2014, Cerberus asked to be, and was, admitted to the bidding process for the NAMA loan book. Cerberus submitted a bid of £1.24 billion on 1 April 2014, a scant six weeks after entering the bidding process. The Cerberus bid was accepted on 3 April. Altogether, that is a breathtaking pace for a purchase of that magnitude—from entering into discussions on 6 February to the winning bid on 3 April.
We should note that at that point Cerberus had no investment history in Ireland, north or south. So why did the company feel confident enough to make such a large purchase—£1.24 billion of distressed loans in the north of Ireland? The answer is that Cerberus hired the firm of lawyers that had been employed by PIMCO, Brown Rudnick, which had previously been involved in the abortive sale. It did so on 24 March 2014, a mere week before Cerberus submitted its winning bid. Cerberus admitted to the Public Accounts Committee of the Irish Parliament that it paid Brown Rudnick £15 million for that one week’s work. Why was Cerberus willing to pay so much? As it admitted to the Irish Parliament, it was to gain detailed knowledge of the debts it was buying. However, NAMA had specifically banned prospective buyers from engaging directly with debtors or key stakeholders. Irish Deputies have accused Cerberus of paying Brown Rudnick so much—£15 million for one week’s work—precisely to obtain knowledge of debtors that it would not have been able to acquire through the formal bid process. Cerberus denies that—I put that on the record—but I leave it to others to assess why the company paid Brown Rudnick so much money for such a short amount of work.
That brings me to my next line of questioning to the Minister. Will he agree to conduct an inquiry into the NAMA sale of its assets in Northern Ireland once the legal proceedings have run their course? That way the issue can be aired, and if there was wrongdoing it can be found out, but if there was not everyone can be cleared. I make no allegations of illegality against Cerberus, but I do criticise its business methods and its growing stranglehold over so-called distressed assets in the UK and Europe. Its business model is bad for small companies and bad for the UK economy. In that context, I have a final question for the Minister: is there any substance to the persistent rumours that Cerberus has approached the Treasury with a view to buying debt from Her Majesty’s Revenue and Customs?
Sammy Wilson (East Antrim) (DUP)
It is a joy to serve under your chairmanship, Mr Owen. May I first of all apologise for the earlier interruption as a result of my phone going off? I congratulate the hon. Member for East Lothian (George Kerevan) on securing this debate. The issue of how Cerberus has dealt with the distressed loan books that it has purchased and the impact that has had on individual businesses is of great importance in Northern Ireland.
I say at the outset that I do not want to deal with the issues raised by the hon. Gentleman at the end of his speech about the sale of the NAMA assets to Cerberus, other than to say this: there was an acknowledgment at that time in Northern Ireland that NAMA had taken £4.7 billion of loans in Northern Ireland under its auspices for a number of years and had been in charge of those loans, but that there were flaws in how it was dealing with the loans. It was felt that there were very good reasons for getting away from a Government-controlled agency, which had difficulties making decisions because of the political connotations and political constraints, and that it was better that those loans were moved from NAMA to another body.
Indeed, there was support for that in Northern Ireland. It was seen as a way of freeing up the market. Having taken the loans on and written them down, and with the Irish taxpayer having been responsible for the costs of the write-down of many of them, it was a difficult decision for NAMA to make and for the Irish Government to allow. They tried to get the market moving again, and allow those people who had borrowed money and defaulted on loans some liberty—they wanted to get equity or money back into the market, and allow people to develop assets and perhaps make money from them. It was therefore felt that moving the assets to a separate body would be better. That is the background to the sale of the assets, for which Cerberus was eventually the successful bidder.
At that stage Cerberus made a number of promises, which it conveyed to the Northern Ireland Executive. First and significantly, it said that it would adopt a long-term strategy and was not involved simply to make money quickly by moving in, closing down the businesses, selling off their assets and leaving. Many of the businesses were viable in their own right but had moved into the property market during the property boom and found that their core business was affected by the loans they had taken on for property. Cerberus made it clear that it would adopt a long-term strategy and look for assets that could grow in capital terms over a longer period and that had an income stream. It indicated that it would be prepared to make money available because it had funds not only to purchase the assets, but to lend to owners of the assets when it was felt that there was potential to enable them to develop and grow, and pay back the loans.
Secondly, Cerberus made it clear that there would be no fixed period and that it was not looking at a time horizon. Again, that provided assurance for many businesses.
Thirdly, Cerberus said that it would use local staff, and that it would employ people who understood the market and the businesses. Significantly, I remember dealing with one case that perhaps shows how Cerberus were much more aggressive. An individual faced a staff member that Cerberus had employed from the bank that he had previously banked with and which held his loan. That same person was demanding far harsher terms from him when working for Cerberus than they had offered as a bank employee when the loan rested with that bank. That shows what happened, despite the promises that were made. By the way, the banks were not easy on their customers, and yet the same employee, when operating for a different firm, was much more aggressive and hard-headed.
Fourthly and very importantly, Cerberus indicated that—I do not know whether this is true of the loan books that were purchased from other banks—it does not pay and build into the value of any loans that it purchases the value of personal guarantees. Cerberus made a virtue of that, saying that, as no value was attached to the personal guarantees, it would be easy to exempt people from personal guarantees. Very often, the personal guarantees prevented businesses from being able to borrow, and to try and develop an asset, because they always had the value of the personal guarantee hanging over them.
Fifthly, Cerberus said there would be a presumption in favour of the incumbent—in other words, where possible, it would try to work with the people who held the loans. That made good sense. They knew the assets and were probably already involved in the business, so they would be easier to work with.
Lastly, Cerberus indicated that it would find ways of trying to liquidate the companies through equity finance and loans, and in other cases by writing down debts.
As I am sure Members have found time and again, Cerberus claimed that it wanted to work with individuals and to have a consensual approach with the people who held the loans. That has not been the experience, although in some cases, businesses will testify that it worked. I can think of large businesses in Northern Ireland that were able to do deals, but by and large, the approach has been aggressive—aggressive to the point of incompetence, in fact, as one financial adviser put it to me. Sometimes there was a deal to be done, but when those working on behalf of Cerberus saw a chink of light and that a business was able to pay, they went even further and pushed harder until they pushed them to the brink. In one case when they were on the brink of a deal, some of the assets that were part of the deal were sold, which brought the deal down. There was aggression to the point of incompetence. It might be argued that what happened was good for Cerberus. In some cases it might not have been, but importantly, it was often not good for the businesses. Viable businesses were put to the wall. In some cases, when they did survive, individuals and business owners were driven almost to distraction and had health issues.
Another difficulty was reaching an agreement—I think of what an individual I dealt with said. Cerberus would only speak to businesses when it wanted to speak to them, and businesses wanting to try to move on often found that they were hitting a blank wall—so much for the consensual approach. Even when that did happen, trying to get information about what a deal would look like was very difficult. Rather than trying to help businesses, the approach has almost been more about staring them out, and businesses have been adversely affected.
In most cases—financial advisers tell me this—despite the fact that no timescale was set, Cerberus is loth to do deals beyond two years. A two-year horizon is much too short for businesses when there have been large debts and a big fall in the assets, and when they have been relying on building up an income stream and looking for capital increases in the value of assets as the economy picks up. That has forced many businesses simply to say, “Look, we can’t continue. We will have to accept bankruptcy or constrain ourselves much more than we had anticipated.”
This is the important point: there is very little if any oversight of this area and no regulation, yet it has a huge impact on our economy. Businesses that employ people, pay tax to the Treasury and provide local services are put in jeopardy as a result of loans that can be easily transferred from one financial institution to these companies. There is little or no regulation and the people who originally took out the loans have no say. The terms of those loans can then be changed at the whim of the business that has taken over. I do not believe that that is good for the economy. Some strengthening of the regulations and oversight of the businesses is needed. There also needs to be protection for those who have taken out loans in the first place on certain terms, so they cannot have those loans changed.
Finally, the Treasury needs to look at a point that was well made by the hon. Member for East Lothian: as a result of transfer pricing, the local subsidiary is given loans at high rates of interest to purchase the assets, which keeps its profits down in the United Kingdom, thus avoiding taxes. I would be interested to hear the Minister’s response on the levels of corporation tax paid by businesses such as Cerberus.
Albert Owen (in the Chair)
Order. While Mr Mullin takes his seat on the Front Bench, let me say that the debate will finish at 5.44 pm, so Members have plenty of time, but they should leave at least 10 minutes for the Minister to respond to the debate and two minutes for Mr Kerevan to wind up.
Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)
It is a pleasure to serve under your chairmanship once again, Mr Owen. Thank you for inviting me to take my seat on the Front Bench.
We all owe a great debt to my hon. Friend the Member for East Lothian (George Kerevan) for securing this debate, especially the companies that have been driven to the wall or destroyed by the actions of Cerberus. I know that some of those companies are represented in the Public Gallery today; I hope they find that we have done justice to their cause. My hon. Friend certainly has.
Patrick Grady (Glasgow North) (SNP)
I have a constituent who was affected by the behaviour of the Royal Bank of Scotland’s global restructuring group. Does my hon. Friend agree that there is a huge lack of trust in such major institutions, particularly RBS, which is largely owned by the public purse? It falls to the Government to get a grip on the situation and take the necessary actions that my hon. Friend the Member for East Lothian (George Kerevan) outlined, so that public confidence can be restored and some of the businesses affected can have some hope of restitution.
Roger Mullin
I agree wholeheartedly. Indeed, in a debate on a related issue last week, I raised the fact that many people and small businesses will find it extraordinary that banks such as RBS have no duty of care towards the customers they deal directly with. Given all the tales of misery caused either by the banks directly or by Cerberus, surely we need to ensure that there is proper regulation and a proper duty of care towards those who suffer at the hands of such institutions.
Sammy Wilson
The hon. Gentleman makes a point about banks’ duty of care and their improper behaviour. The coalition Government commissioned a review into that matter, but it has never been published. One wonders why its contents have not been made open for debate so that we can see the banks’ practices.
Roger Mullin
I agree entirely. Perhaps the Minister will give a more detailed response to that point than I can, because it dumbfounds me that such secrecy has surrounded so much of this.
Yesterday I spoke on the Criminal Finances Bill, so I feel particularly at ease speaking about this matter a day later. As we have heard from a number of Members, much of what has happened has involved what ordinary members of the public would call criminal activity. Indeed, some legal actions are under way; obviously I cannot speak about them in detail, but the fact that they are being pursued speaks for itself. I am not sure what the correct term is, but if there were ever an example of a company that operates to standards that are the very reverse—[Interruption.]
Albert Owen (in the Chair)
Order. The Minister and his Parliamentary Private Secretary may pass notes to each other but not speak. There should be only one speaker at a time.
Roger Mullin
If the messages that are being passed are going to answer some of my questions, I will not object too severely.
As I was saying, Cerberus is an example of a company that operates to standards that are the very reverse of a duty of care towards small businesses in our country. Surely we can expect the Government to be concerned about the effect on the good people who have suffered at its hands. In my constituency, a perfectly good trading company of many years’ standing was completely destroyed by the actions of Cerberus, in a similar way to another company mentioned earlier. It was willing to repay the loan, but the additional fees that it was stuck with and the way in which Cerberus operated drove it to bankruptcy. I will not name the company, because like other hon. Members I do not want to embarrass anyone who may be listening, but I am genuinely concerned about the health of the family who were treated in that way.
Let me comment on some points made by other hon. Members. My hon. Friend the Member for Ayr, Carrick and Cumnock (Corri Wilson) said in an intervention how difficult it has been to get a conversation between Cerberus and those affected by its actions. It seems that it is unwilling to speak except in the remarkable case that the hon. Member for East Antrim (Sammy Wilson) mentioned, when it sought to buy assets in Northern Ireland and was only too happy to make promises such as adopting a long-term strategy—that would be a novel thing for it to do.
George Kerevan
On the subject of secrecy and Cerberus, is my hon. Friend aware that Stephen Feinberg, Cerberus’s founder, is the leading candidate to undertake the review of the American secret service under Donald Trump?
Roger Mullin
Yes, I am aware of that. One can be fairly confident that that review of the secret service will itself be done in the greatest of secrecy.
I was also taken by some of Cerberus’s other promises that the hon. Member for East Antrim mentioned, such as making a presumption in favour of the incumbent and not squeezing value out of assets. It would appear that Cerberus has decided to act in a way that is precisely the reverse of its public promises.
I must pay yet more tribute to my hon. Friend the Member for East Lothian for the clear way in which he set out one or two facts that I hope the Minister will respond to, particularly the manufacturing of distress by the operation of such institutions and the movement from regulated to unregulated markets.
Cerberus proudly proclaims that it can make profits of 17% to 20% out of the tax avoidance schemes that it engages in, extracting value by moving between the UK, Ireland and the Netherlands. It is therefore not only small and medium-sized enterprises that are victims of the way in which Cerberus is operating, but the Treasury as well. I particularly look forward to the answer that the Minister must surely give to the question that my hon. Friend asked in his opening remarks: what has the loss been to the taxpayer in the UK from the actions of Cerberus? Everyone deserves to receive an answer to that this afternoon.
Peter Dowd (Bootle) (Lab)
It is, as ever, a pleasure to serve under your stewardship, Mr Owen.
Hon. Members have already made excellent points in the debate, particularly the hon. Member for East Lothian (George Kerevan), who I know has been interested in this matter for some time and has a great deal of knowledge of it. I appreciate that he has enabled us to have the opportunity to consider this matter and that he has shared his thoughtful views, which were, as always, penetrating.
This matter has its origins in the financial crisis. I do not want to regurgitate the debate about the origin of that crisis, but increasingly it is apparent that it is not simply about the claims, for example, that the last Labour Government “maxed out” on the country’s credit card—a hackneyed claim, if ever there was one, and one that does not go to the heart of why this situation has occurred.
The 2008 crisis almost brought down the world’s financial system; it took huge taxpayer-financed bail-outs to shore up the industry. In that regard—this relates to the last point that the hon. Member for Kirkcaldy and Cowdenbeath (Roger Mullin), the Scottish National party spokesman, made—it is important that taxpayers get value for money when assets are sold. The process must be as open and transparent as possible, and it must stand up to scrutiny at the time and thereafter, especially when public services across the board are under such strain. The Government ought not to sell on assets when the people at the other end of the process are going to be treated unfairly and unjustly at some point. That is not acceptable. As has been said, the Government have a duty of care.
I will concentrate my comments today on the here and now, as other Members have covered the pertinent background and context of this matter, for which I am grateful. I will not repeat what they have said, other than to say that issues about on-selling, the plight of customers, business models, tax avoidance, the cost to the taxpayer, the regulatory issues and—fundamentally—the duty of care to people and businesses have gone completely and utterly out of the window.
The Government’s response to the Public Accounts Committee’s 24th report of this Parliament was sandwiched in between the PAC’s reports on “Universal Credit and fraud and error”, and the “UnitingCare Partnership contract”, and those reports do not exactly show Government management in those policy areas to be particularly competent either. I believe that the PAC’s report on this matter is a good place to start, as it is the current Government who made the decision to dispose of this £13.5 billion of mortgages and loans to Cerberus.
As you know, Mr Owen, in Greek mythology Cerberus was the three-headed “hound of Hades” who guarded the doors of hell, to stop the dead from leaving and the living from getting in. That is a metaphor for this organisation; it stops people from leaving. It gets them by the throat and they are trapped forever, and that is not acceptable. I am not sure what to make of that name for a company, but it is well worth leaving that in the air for people to ponder on for a moment.
As hon. Members will be aware, we have been led to understand that the sale of these assets represented the Government’s largest ever financial asset sale, and we have been told that it was “value for money”. I would expect the Government to claim nothing less, so there is no surprise in their making that statement. However, it prompts the question: what evidence have the Government given to support that assessment? The answer is, “Very little”.
If the Government’s claims stack up, why are they so reluctant to accept certain recommendations set out in that PAC report, not least those on the issue of transparency? Why have the Government rejected the recommendations regarding the setting up of an independent panel of valuation experts for all major sales, to review and challenge valuations in advance of all large asset sales and the reliability of the organisations that those assets are going to? If that had been done in this instance, we might not be in this situation. Surely such an evaluation would vindicate the Government’s position that what they did was correct, above board and transparent, and that no one is any worse off for the decision they took. However, that has not happened.
Similarly, the Opposition find it difficult to understand why, if the Government are committed to tackling tax avoidance and evasion, they rejected the PAC’s recommendations that Government Departments should be required “as far as possible” to discount gains from tax avoidance that may be factored into bids, and that the Treasury should produce unambiguous guidance, for both selling Departments and potential bidders, on how tax will be taken into consideration as part of a sale or a contract award. The Government have done nothing about those recommendations either, and their answer to the PAC’s report is incredibly vague. It goes around and around in a circle, and no one can break into it.
Nevertheless, the Government are proud of their enormous financial asset sale, claiming, as I have said, that it was a good deal for the taxpayer. I am not convinced about that, and it certainly was not a good deal for the end users who were on the receiving end of it.
It is true that the National Audit Office said that some aspects of the sale were conducted appropriately, but the NAO also raised a number of key concerns about the Government’s approach. Mortgage holders who are worried about the future will not have been reassured by anything that the Government have done, and the NAO pointed out:
“While the mortgages and loans are currently owned by FCA-licensed entities, they, like any…mortgage, could be sold in the future to an entity which is not regulated. If…customers needed to seek redress, they would have to do so under the Consumer Rights Act”.
That is not right. The Government have a duty of care, but they did not seem to care, as they wanted these assets off the books.
It does not stop there. The NAO criticised other aspects of the sale, saying, for example, that UK Asset Resolution Ltd’s
“limited competitive tendering in the procurement process for its financial adviser was not good practice.”
That refers to the sale of assets, which was not done under appropriate good practice. Similarly, the financial advising company involved—Credit Suisse—also acted as financing bank to the bidder. The NAO said of that:
“Due to a potential conflict of interest, this had not been permitted under previous sales.”
So I ask the Minister—what of that? Or is that detail unimportant?
When it comes to people’s lives and businesses, and for example to public sector staffing, we should note that, according to the NAO:
“UKAR identified an alternative sale option which had a higher…valuation.”
So the assets might have gone to someone more appropriate, but UKAR
“did not have enough staff capacity to run multiple transactions concurrently”.
There is something wrong with that situation, and it goes to the heart of the duty of care not only to the taxpayer but to the people affected by this matter, who in effect got a double whammy.
The Government have a lackadaisical attitude to this matter; indeed, it borders on the insouciant. Surely, given that there was such value for money for the taxpayer, it is not unreasonable to ask how it can be that our hospitals and schools are in a state of crisis and starved of funding, because they are being affected by this as well. When Opposition Members hear the phrase “value for money”, which has been rammed down our throats time after time in relation to this matter, we ask, “Which values?”, and, “For whom?”
This week, NHS trusts posted a massive deficit of almost £1 billion at the end of the third quarter, and yet we are told that this sale is value for money. Meanwhile, social care is in crisis, with 1.2 million elderly people needing care, but we are still told that this is value for money. Selling off assets not in the interests of the many, not in the interests of the taxpayer and not in the interests of the people sitting behind us in Westminster Hall today, but just to fund a failed deficit reduction programme, is not acceptable. It is a false saving.
Finally, the Government say that they will learn lessons from these reports, and I applaud them for that. The question is, when will they share those lessons with the rest of us and prevent this dreadful scam from ever happening again?
Albert Owen (in the Chair)
Order. The hon. Gentleman has finished speaking. I will call the Minister, who may want to give way to you.
The Economic Secretary to the Treasury (Simon Kirby)
It is a pleasure to serve under your chairmanship, Mr Owen. I congratulate the hon. Member for East Lothian (George Kerevan) on securing this debate. I will give way if the hon. Member for South Antrim (Danny Kinahan) wishes to contribute.
Danny Kinahan (South Antrim) (UUP)
I want to ensure that we are going to put in place or ask for regulations to stop people being able to move from one side of a deal to another. It does happen, and we need transparency and the duty of care. Will the Minister look at the issue? One person moved from being on the board to being on the other side and making money out of the deal. They were then caught taking a bribe in a car. We need a very clear system.
Simon Kirby
It is the long-standing policy of this Government to unwind the interventions made in the financial sector during the banking crisis of 2007-09 and return the assets acquired then to the private sector. That is a key part of restoring normality to the financial system, but in that we need to ensure value for money in getting back taxpayers’ money. We are making good progress in that. UK Asset Resolution, which is responsible for the assets of the former Northern Rock and Bradford & Bingley, has already reduced its balance sheet from £116 billion in 2010 to £37 billion last year. The sale of £13 billion of former Northern Rock mortgages to Cerberus Capital Management was another important step along the way.
As with any transaction of such complexity, the sale required careful analysis and meticulous planning. First and foremost, the Government had to consider whether the sale would meet one fundamental condition: good value for money for the British taxpayer. Secondly, however, the deal needed to ensure the continued fair treatment of existing customers. In this case, they held around 270,000 mortgages and unsecured loans. We are confident that as a result of the detailed preparation we conducted, those conditions were fully met.
It is perhaps worth providing a brief outline of the processes followed. The sale was initially announced at the 2015 Budget, following various expressions of interest and favourable market conditions. A full sales process was then launched that summer. It attracted a good level of competition, with multiple bidders involved, as the National Audit Office noted. At each stage of the process, experts in UKAR worked closely with UK Financial Investments and independent external advisers to assess against the four main criteria used in any public sale, namely: propriety, regularity, feasibility and value for money. Cerberus is an active buyer of assets across the UK and elsewhere, and UKAR carried out thorough due diligence before it was selected. Its bid represented a £280 million premium to the book value of the loans, and, importantly, it maintained the fair treatment of customers.
George Kerevan
I accept what the Minister is saying—it has been justified by the National Audit Office—but in the assessment of the bid from Cerberus, was any account taken of the likelihood that it would use tax avoidance measures to complete the sale?
Simon Kirby
The hon. Gentleman raises a fair point. I will answer it shortly, if he bears with me.
Not only were customers’ mortgage terms and conditions unchanged by the sale, but they continued to be served by the same mortgage company with the same skilled and dedicated staff. In the contract with Cerberus, UKAR went further to ensure that specific additional protections were in place, including a one-year lock-in period that limited any increase in interest rates to changes in the base rate. All the mortgages are still protected by Financial Conduct Authority regulation. Owing to comprehensive planning and preparation, it was a well-executed sale, achieving good value for money and a good outcome for customers.
Various Members have expressed their views concerning purchases of assets by Cerberus. Unsurprisingly, I will not comment specifically on sales made by other parties to a private bidder. However, in the context of our sale, I will turn to some of the specific points raised by Members, including the hon. Members for East Antrim (Sammy Wilson), for East Lothian and for Bootle (Peter Dowd). They made thoughtful and helpful contributions.
One point that was raised was the tax domicile of Cerberus. UKAR’s sale was structured as a UK sale, and the taxes resulting directly from the sale are paid in the UK. However, we do not consider a bidder’s tax jurisdiction as part of the selection process for three reasons: first, to do so would greatly reduce the number of bidders able to participate, which would risk losing the competitive tension that is essential for maximising value; secondly, companies can and do change their tax arrangements, so there would be no guarantee that a UK-domiciled company would continue to be so in the future; and thirdly, to discriminate against a company based on its tax jurisdiction would risk our being exposed to legal challenge.
The hon. Member for Bootle mentioned the Public Accounts Committee. I note that its conclusions were that the transaction was executed successfully and that there were many positives from the sale. The Treasury response to the recommendations was clearly set out in a report, “The sale of former Northern Rock assets”. He also mentioned the NAO’s criticisms and touched on the important area of lessons to be learned. As the NAO report notes, UKAR and UKFI carried out a complex transaction “professionally” and “within a tight timeframe”. As the NAO suggested, we have increased transparency around the objectives of Her Majesty’s Treasury, UKFI and UKAR and ensured that strategic documents are drawn together in one place. UKAR has now published its framework document.
We heard about Project Eagle and the sale of Northern Irish loans by the National Asset Management Agency in Ireland. Specifically on that issue, Cerberus provided UKAR with suitable assurances consistent with the detailed submission it made to the Northern Ireland Committee for Finance and Personnel, which conducted an inquiry into the sale. That provided sufficient comfort. When we selected Cerberus as a preferred bidder, it was on the shortlist for another portfolio in Ireland. More generally, as UKAR would for any bidder, it carried out thorough due diligence of Cerberus as part of the selection process.
The hon. Member for East Antrim expressed various concerns about the treatment of businesses by Cerberus. I listened to those concerns carefully. When it came to the UKAR sale, customer treatment was a key consideration. Our sale did not contain any commercial loans. The NAO report states that the FCA protections for the borrowers whose mortgages were sold remain in place, and that the FCA continues to be satisfied.
We are aware that Cerberus is a buyer of assets across the UK and further afield. It is subject to the UK regulatory regime here and other regulatory regimes in other jurisdictions in which it operates. I am proud to say that the UK Government have ensured that we have a strong system of regulation here in the UK.
We have heard today about other asset purchases by Cerberus. It is an active buyer of assets across the UK and further afield. As I have said, it is not for me to comment on sales made by other parties to a commercial bidder, but we assess all bids thoroughly through our extensive due diligence carried out on any bidder for any assets. We particularly assess value for money and, importantly, continued fair treatment for customers. The assets in the recent £13 billion sale were not distressed assets. Having been originated a number of years ago, they were considered well seasoned assets, and Cerberus paid above book value for them. In any case, ensuring the continued fair treatment of existing customers is a key consideration in all sales, as I have said.
In short, the sale of £13 billion of former Northern Rock assets to Cerberus was a successful step on the way to returning assets to the private sector. It meant £5.5 billion coming back into the national purse, as well as the transfer of nearly £8 billion of liabilities from the public balance sheet to Cerberus. The sale was managed effectively, and it attracted good competition and secured a good price.
Roger Mullin
Minister, you have been talking for some considerable time. Am I being unfair in saying that the gist of your argument is that you do not consider that Cerberus has acted in any way unfairly—
Albert Owen (in the Chair)
Order. I know that the hon. Gentleman was referring to the Minister, not to me, but the Minister must respond now.
Simon Kirby
It is important that the Government attract good competition and secure a good price, but at the same time safeguard the rights of existing customers. It is not just our assessment that that happened but the conclusion of the independent National Audit Office. The Public Accounts Committee also concluded that the sale had been well executed. There is still work to be done in returning to the private sector assets that we acquired in the financial crisis. We will continue to do all we can to meet the same high standards and keep delivering the highest possible value to the British taxpayer.
George Kerevan
I thank all Members who have taken part in the debate, and I thank your good self, Mr Owen, for ensuring that the debate was in order.
I know that the Minister has tried to be helpful, within his brief, but the point still stands that Cerberus uses a tax model across all its purchases that is not beneficial to the Treasury. We will continue to press on this matter in the days to come.
Question put and agreed to.
Resolved,
That this House has considered the purchase of distressed assets by Cerberus Capital Management.